Over the past several years, Armenia has received respectable rankings in international indices that review country business environments and investment climates. Significant U.S. investments are present in Armenia, most notably ContourGlobal’s acquisition of the Vorotan Hydroelectric Cascade and Lydian International’s efforts to develop a major gold mine. U.S. investors in the banking, energy, pharmaceutical, information technology, and mining sectors, among others, have entered or acquired assets in Armenia. Armenia presents a variety of opportunities for investors, and the country’s legal framework and government policy aim to attract investment, but the investment climate is not without challenges. Obstacles include Armenia’s small market size, relative geographic isolation due to closed borders with Turkey and Azerbaijan, weaknesses in the rule of law and judiciary, and a legacy of corruption. Net foreign direct investment inflows are low. Armenia is a member of the Eurasian Economic Union, a customs union that brings Armenia, Belarus, Kazakhstan, Kyrgyzstan, and Russia together in an integrated single market. In May 2015, Armenia signed a Trade and Investment Framework Agreement with the United States. The TIFA establishes a United States-Armenia Council on Trade and Investment to discuss bilateral trade and investment and related issues. In November 2017, Armenia signed a Comprehensive and Enhanced Partnership Agreement with the European Union, which aims in part to improve Armenia’s investment climate and business environment.
Armenia imposes few restrictions on foreign control and rights to private ownership and establishment. There are no restrictions on the rights of foreign nationals to acquire, establish, or dispose of business interests in Armenia. Business registration procedures are straightforward. According to foreign companies, otherwise sound regulations, policies, and laws are sometimes undermined by problems such as the lack of independence, capacity, or professionalism in key institutions, most critically the judiciary. Armenia does not limit the conversion and transfer of money or the repatriation of capital and earnings. The banking system in Armenia is sound and well-regulated, but investors note that the financial sector is not highly developed. The U.S.-Armenia Bilateral Investment Treaty provides U.S. investors with a variety of protections. Although Armenian legislation offers protection for intellectual property rights, enforcement efforts and recourse through the courts require improvement.
Armenia experienced a dramatic change of government in April/May 2018. Parliamentary elections in December 2018 led to the exit from power of numerous parliamentarians known to have significant business holdings in Armenia and exercise outsized sway over large sections of the economy. An anti-corruption campaign is underway as part of efforts to eliminate systemic corruption. Overall, the competitive environment in Armenia is improving, but several businesses have reported that broader reforms across judicial, tax, customs, health, education, military, and law enforcement institutions will be necessary to shore up these gains. Despite progress in the fight against corruption and improvements in some areas that raise Armenia’s attractiveness as an investment destination, investors claim that numerous concerns remain and must be addressed to ensure a transparent, fair, and predictable business climate. An investment dispute in the country’s mining sector has attracted significant international attention and remains outstanding after several years.
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
The government of Armenia officially welcomes foreign investment. The Ministry of Economy is the main government body responsible for the development of investment policy in Armenia. Armenia has achieved respectable rankings on some global indices measuring the country’s business climate. Armenia’s investment and trade policy is relatively open; foreign companies are entitled by law to the same treatment as Armenian companies. Armenia has strong human capital and a well-educated population, particularly in the science, technology, engineering, and mathematics fields, leading to significant investment in the high-tech and information technology sectors. Many international companies have established branches or subsidiaries in Armenia to take advantage of the country’s pool of qualified specialists and position within the Eurasian Economic Union (EAEU). However, many businesses have identified challenges with Armenia’s investment climate in terms of the country’s small market (with a population of less than three million), relative geographic isolation due to closed borders with Turkey and Azerbaijan, per capita gross national income of $4,230, and concerns related to weaknesses in the rule of law.
After a dramatic change of government in April/May 2018, major sectors of Armenia’s economy have ostensibly become more open to competition. Large businesses backed by oligarchic interests are notionally less able to draw on government support to prop up their market positions. An anti-corruption campaign was launched after the 2018 change of government, and a series of high-profile cases have resulted as part of efforts to eliminate systemic corruption. These developments serve to improve Armenia’s investment climate and competitive environment, though the fight against corruption needs to be institutionalized in the long term, especially in critical areas such as the judiciary, tax and customs operations, and health, education, military, and law enforcement sectors. Foreign investors are still concerned about the rule of law and equal treatment. U.S companies have also reported that the investment climate is tainted by a failure to enforce intellectual property rights. There have been concerns regarding the lack of an independent and strong judiciary, which undermines the government’s assurances of equal treatment and transparency and reduces access to effective recourse in instances of investment or commercial disputes. Representatives of U.S. entities have raised concerns about the quality of stakeholder consultation by the government with the private sector and government responsiveness in addressing concerns among the business community. The Armenian National Interests Fund and Investment Support Center are responsible for attracting and facilitating inward foreign direct investment.
Limits on Foreign Control and Right to Private Ownership and Establishment
There are very few restrictions with regard to limitations on foreign ownership or control of commercial enterprises. There are some restrictions on foreign ownership within the media and commercial aviation sectors. Local incorporation is required to obtain a license for the provision of auditing services.
The Armenian government does not maintain investment screening mechanisms for foreign direct investment, though government approval is required to take advantage of certain tax and customs privileges.
Armenia has traditionally fared well in the World Bank’s Ease of Doing Business report. The government has announced its commitment to addressing deficiencies that prevent Armenia from obtaining a higher ranking. Companies can register electronically at http://www.e-register.am/en/. This single window service was launched in 2011 and allows individual entrepreneurs and companies to complete name reservation, business registration, and tax identification processes all at once. The application can be completed in one day. An electronic signature is needed in order to be able to register online. Foreign citizens can obtain an e-signature and more detailed information from the e-signature portal at https://www.ekeng.am/en/. In December 2019, the government launched a new e-regulations platform that provides a step-by-step guide for business and investment procedures. The platform is available at https://armenia.eregulations.org/.
Outward Investment
The Armenian government does not restrict domestic investors from investing abroad.
10. Political and Security Environment
Armenia has a history of political demonstrations, some of which have turned into violent confrontations between the police and protesters. However, the frequency of violent protests has significantly decreased. The last major violent protest occurred in July 2016, when an armed group, Sasna Tsrer, stormed and occupied a police compound in Yerevan. Three police officers were killed as a result. During the two-week standoff that followed, Sasna Tsrer took hostage additional police and medical personnel, demanding political changes. During the standoff, demonstrations in support of Sasna Tsrer took place in Yerevan and clashes between law enforcement officers and protesters occurred. These clashes did not pose any damage to businesses. In 2018, Armenia experienced a peaceful revolution that led to a change of government. Acts of peaceful civic disobedience in Yerevan and some other cities led to street closures, including on the road to Yerevan’s international airport, but did not impede the ordinary functioning of business or harm the country’s macroeconomic stability. These actions did not result in any damage to projects or installations. It is unlikely that civil disturbances, should they occur, would be directed against U.S. businesses of the U.S. community.
Casualties continue to occur in the Nagorno-Karabakh conflict. Intermittent gunfire and the occasional use of artillery systems, land mines, and mortars result in deaths and injuries each year along the line of contact and the international border between Armenia and Azerbaijan. Engaging in commercial activities inside the Nagorno-Karabakh region can make it difficult to conduct business inside Azerbaijan or with the Azerbaijani government. The Azerbaijani government has suspended or threatened to suspend the operations of U.S. companies in Azerbaijan whose products or services are provided in Nagorno-Karabakh and has banned the entry into Azerbaijan of some persons who have visited Nagorno-Karabakh. The U.S. government is unable to provide emergency services to U.S. citizens in the Nagorno-Karabakh region as U.S. government employees are restricted from traveling there. There have been no threats to commercial enterprises from violence along the line of contact or the international border between Armenia and Azerbaijan.
Azerbaijan
Executive Summary
The overall investment climate in Azerbaijan continues to improve, although significant challenges remain. Over the past few years, Azerbaijan’s government has sought to attract foreign investment, undertake reforms to diversify its economy, and stimulate private sector-led growth. However, the Azerbaijani economy remains heavily dependent on oil and gas output, which account for roughly 90 percent of export revenue and over half of the state budget. Real GDP grew 2.2 percent in 2019, primarily due to a ramp up in natural gas exports. While the oil and gas sector has historically attracted the largest amount of foreign investment, the Azerbaijani government has targeted four non-oil sectors to diversify the economy: agriculture, tourism, information and communications technology (ICT), and transportation. Measures taken in recent years to improve the business climate and reform the overall economy include eliminating redundant business license categories, empowering the popular “ASAN” government service centers with licensing authority, simplifying customs procedures, suspending certain business inspections, and reforming the tax regime.
Azerbaijan fell from 25th to 34th among 190 countries in the “Doing Business 2020” rating published by the World Bank and the International Finance Corporation. According to the report published on October 24, Azerbaijan carried out four successful reforms from May 2018 to May 2019, thereby fulfilling four out of five goals. These reforms were related to registering property, obtaining credit, protecting minority investors, and enforcing contracts. Due to these indicators, Azerbaijan was featured as one of the top 20 “reformer” countries. However, progress remains slow on structural reforms required to create a diversified and competitive private sector, and corruption remains a major challenge for firms operating in Azerbaijan. A small group of government-connected holding companies dominate the economy, enforcement of intellectual property rights is insufficient, and judicial transparency is lacking.
Under Azerbaijani law, foreign investments enjoy complete and unreserved legal protection and may not be nationalized or appropriated, except under specific circumstances. Private entities may freely establish, acquire, and dispose of interests in business enterprises. Foreign citizens, organizations, and enterprises may lease, but not own, land. Azerbaijan’s government has not shown any pattern of discriminating against U.S. persons or entities through illegal expropriation. The Bilateral Investment Treaty (BIT) between the United States and Azerbaijan provides U.S. investors with recourse to settle investment disputes using the International Center for the Settlement of Investment Disputes (ICSID). The average time needed to resolve international business disputes through domestic courts or alternative dispute resolution varies widely.
Azerbaijan considers travel to the region of Nagorno-Karabakh and the surrounding territories unlawful. Engaging in any commercial activities in Nagorno-Karabakh and the surrounding territories, whether directly or through business subsidiaries, can result in criminal prosecution and/or other legal action against individuals and/or businesses in Azerbaijan; it may also affect the ability to travel to Azerbaijan in the future.
1. Openness To, and Restrictions Upon, Foreign Investment
Policies towards Foreign Direct Investment
Over the past few years, the Azerbaijani government has actively sought to attract foreign investment. Flows of foreign direct investment to Azerbaijan have risen steadily in recent years, primarily in the energy sector. Foreign investment in the government’s priority sectors for economic diversification (agriculture, transportation, tourism, and ICT) has thus far been limited.
Foreign investments enjoy complete and unreserved legal protection under the Law on the Protection of Foreign Investment, the Law on Investment Activity, and guarantees contained within international agreements and treaties. In accordance with these laws, Azerbaijan will treat foreign investors, including foreign partners in joint ventures, in a manner no less favorable than the treatment accorded to national investors. Azerbaijan’s Law on the Protection of Foreign Investments protects foreign investors against nationalization and requisition, except under specific circumstances. The Azerbaijani government has not shown any pattern of discriminating against U.S. persons or entities through illegal expropriation.
Azerbaijan’s primary body responsible for investment promotion is the Azerbaijan Export and Investment Promotion Agency (AzPromo). AzPromo is a joint public-private initiative, established by the Ministry of Economy and Industry in 2003 to foster the country’s economic development and diversification by attracting foreign investment into the non-oil sector and stimulating non-oil exports. A January 2018 decree called for new legislation, which has not yet been introduced, to ensure Azerbaijan conforms to international standards to protect foreign investor rights. The Azerbaijani government meets regularly with the American Chamber of Commerce (AmCham) to solicit the input from the business community, particularly as part of AmCham’s biennial white paper process. In 2018, AmCham reported the government accepted around 50 percent of the proposals put forth in their white paper. The next white paper will be presented in 2020.
Limits on Foreign Control and Right to Private Ownership and Establishment
Foreigners are allowed to register business entities by opening a fully owned subsidiary, acquiring shares of an existing company, or creating a joint venture with a local partner. Foreign companies are also permitted to operate in Azerbaijan without creating a local legal entity by registering a representative or branch office with the tax authorities.
Foreigners are not permitted to own land in Azerbaijan but are permitted to lease land and own real estate. Under Azerbaijani laws, the state must retain a controlling stake in companies operating in the mining, oil and gas, satellite communication, and military arms sectors, limiting foreign or domestic private ownership to a 49 percent share of companies in these industries. Foreign ownership in the media sector is also strictly limited. Furthermore, a special license to conduct business is required for foreign or domestic companies operating in telecommunications, sea and air transportation, insurance, and other regulated industries. Azerbaijan does not screen inbound foreign investment and U.S. investors are not specifically disadvantaged by any existing control mechanisms.
Other Investment Policy Reviews
Azerbaijan has not conducted an Organization for Economic Cooperation and Development (OECD) investment policy review, a United Nations Conference on Trade and Development (UNCTAD) investment policy review, or a WTO Trade Policy Review.
Business Facilitation
Azerbaijani law requires all companies operating in the country to register. Without formal registration, a company may not maintain a bank account, or clear goods through customs. As part of the ongoing business law reforms, a “Single Window” principle was introduced January 1, 2008, significantly streamlining the registration process. Businesses must now only register with the tax authorities, which takes approximately three days for commercial organizations. Since 2011, companies have also been able to e-register at http://taxes.gov.az.
Azerbaijan ranked 34th and joined the top 20 “reformer” countries, according to the World Bank’s “Doing Business 2020” report. Over the period from May 2018 to May 2019, the government implemented four reforms related to obtaining registration of real estate rights, obtaining loans, and protecting minority shareholders. In addition, Azerbaijan made enforcing contracts easier by introducing an e-system allowing plaintiffs to file an initial complaint electronically and by adopting a consolidated law on voluntary mediation, according to the report. The country has also improved its position in terms of “obtaining loans” indicator, climbing 21 spots to take first place.
Outward Investment
Azerbaijan does not actively promote or incentivize outward investment, though Azerbaijani entities, particularly the State Oil Company of Azerbaijan (SOCAR) and the State Oil Fund of Azerbaijan (SOFAZ), have invested in various countries, including the United States. SOFAZ investment is typically limited to real estate, precious metals, and low-yield government securities. SOCAR has invested heavily in oil and gas infrastructure and petrochemicals processing in Turkey and Georgia, as well as gas pipeline networks in Greece, Albania, and Italy as part of the Southern Gas Corridor that transports Azerbaijani gas to European markets. The government does not restrict domestic investors from investing overseas.
2. Bilateral Investment Agreements and Taxation Treaties
Azerbaijan has signed 51 Bilateral Investment Treaties (BIT). The 2001 BIT in force between the United States and Azerbaijan facilitates the reciprocal protection of investment. Azerbaijan also has bilateral investment treaties currently in force with: Austria, Belgium-Luxembourg Economic Union, China, Croatia, Czech Republic, Finland, France, Georgia, Germany, Greece, Hungary, Iran, Israel, Jordan, Kazakhstan, South Korea, Kuwait, Kyrgyzstan, Latvia, Lithuania, Moldova, Montenegro, Poland, Romania, Russia, San Marino, Serbia, Spain, Switzerland, Syria, Tajikistan, Turkey, Ukraine, UAE, the United Kingdom, and Uzbekistan.
Azerbaijan has free trade agreements (FTAs) with Russia, Ukraine, Georgia, Kazakhstan, Kyrgyzstan, Tajikistan, Uzbekistan, Moldova, and Belarus. Under the FTAs, goods can be imported from those countries free of customs duties.
The United States signed a double taxation treaty with the USSR, to which Azerbaijan is considered a successor state. The United States and Azerbaijan do not have a separate bilateral double taxation treaty. The United States and Azerbaijan are parties to the OECD Convention on Mutual Administrative Assistance in Tax Matters. Azerbaijan signed an intergovernmental agreement with the United States to implement the Foreign Account Tax Compliance Act (FATCA) on October 9, 2015, based on the “IGA Model 1a” form.
Azerbaijan also has double taxation treaties with: Austria, Belarus, Belgium, Bosnia & Herzegovina, Bulgaria, Canada, China, Croatia, Czech Republic, Denmark, Estonia, Finland, France, Georgia, Germany, Great Britain, Greece, Hungary, Iran, Italy, Japan, Jordan, Kazakhstan, Kuwait, Latvia, Lithuania, Luxembourg, Macedonia, Malta, Moldova, Montenegro, Netherlands, Norway, Pakistan, Poland, Romania, Russia, San Marino, Saudi Arabia, Serbia, Slovenia, South Korea, Spain, Sweden, Switzerland, Tajikistan, Turkey, UAE, Ukraine, Uzbekistan, and Vietnam. Treaties with Jordan, Spain, Sweden, Malta and Denmark are pending ratification by the parliament of Azerbaijan.
10. Political and Security Environment
On multiple occasions in 2019, authorities selectively blocked mobile and fixed-line internet access, temporarily restricted access to foreign media and social networking sites, and imposed blocks on virtual private network (VPN) services, apparently in response to political protests. Radio Free Europe/Radio Liberty are among the sites permanently blocked in Azerbaijan. The increase in frequency and lack of transparency regarding internet disruptions raise serious concerns about future Azerbaijani government efforts to control access to information in ways that impede foreign business interests.
There have been no known acts of political violence against U.S. businesses or assets, nor against any foreign owned entity. It is unlikely that civil disturbances, should they occur, would be directed against U.S. businesses or the U.S. community.
A cease-fire with Armenia has been in effect since 1994 for the conflict surrounding the disputed region of Nagorno-Karabakh. However, intermittent gunfire along the cease-fire line and along the border with Armenia continues, often resulting in injuries and/or deaths. There have been no threats to commercial enterprises from skirmishes in the border areas. The Azerbaijani government has suspended or threatened to suspend the operations of U.S. companies in Azerbaijan if the companies’ products or services are provided in Nagorno-Karabakh. Azerbaijan considers travel to the region of Nagorno-Karabakh and the surrounding occupied territories unlawful. Engaging in any commercial activities in Nagorno-Karabakh and the surrounding occupied territories, whether directly or through business subsidiaries, can result in criminal prosecution and/or other legal action being taken against individuals and/or businesses in Azerbaijan; it may also affect the ability to travel to Azerbaijan in the future. Due to the existing state of hostilities, consular services are not available to U.S. citizens in Nagorno-Karabakh.
